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Ekadharma International: A Small Cap but Fundamentally Good Stock

In the last few days I receive suggestions from several friends to discuss an unknown stock, but its fundamentals are good. This stock is Ekadharma International (EKAD). EKAD is a relatively small company with a market capitalization of only Rp227 billion at a price of 325. Although classified as a small cap stock, but its trading volume in the market is quite liquid with an average transaction of 4 million shares per day.

EKAD is a specialist manufacturer of adhesive tape (duct tape) and wrapping foil, with the brand 'Daimaru'. The company's factory is located in Pasar Kemis Industrial, Tangerang, while the company's distribution network is spread from Medan to Makassar. EKAD also had a side business in the field of printer cartridge refill service, but its contribution to company overall revenues is small. In addition to selling its products in the country, EKAD also exported adhesive tape to Malaysia adhesive.

By IDX, EKAD is categorized as a chemical company, in the same group with Barito Pacific (BRPT), Sorini Agro Asia (SOBI), and Eterindo Wahanatama (ETWA), because the company is producing adhesive tape using chemical raw materials derived from petroleum. EKAD imports most of its raw materials, so that corporate profits are easily affected by fluctuations in the Rupiah against the US Dollar. In the third quarter of 2011, EKAD received a loss from foreign exchange amounting to Rp5 billion, so that its comprehensive net profit decrease 17.6%. Fortunately this account of foreign exchange is categorized as other comprehensive income, so that the earning per share of the company is still increased 26.6% to Rp23 billion.

Regardless of the company's dependence on imported raw materials, EKAD is one of the market leaders for adhesive tape products, a 'mandatory' item that should be available in all office spaces, schools, and colleges, so that the company’s revenue constantly increasing from year to year, due to higher demand and higher prices (in accordance with inflation rate) of the products. My point is, even though the company is only doing its routine works, almost without any expansion, the corporate earnings will continue to rise throughout the year, or at least that's what happened over the last five years. EKAD is a company that is more likely to operate normally, aka do not really like to hold certain corporate actions. EKAD also does not include companies that have the hobby to talk to the media (so that’s why you may never heard about this company before).

The conclusion, EKAD is fairly attractive for long-term investment, because the company tends to be 'straight' and its business outlook is also good, because the company plays in the consumer market (to sell products directly to consumers). The company is also fairly profitable, with an average ROA of above 15%. Now what about its latest financial performance?

Although the company is rarely hold a corporate action, but it does not mean that EKAD never do it at all. On July 7, 2011, EKAD alloted bonus shares to its shareholders, with a ratio of 4 : 1, so the number of EKAD’ outsanding shares in the market increased by 25%, from 559 into 699 million pieces. For investors who already hold the shares before the July 7, this corporate action would not be a problem. But for investors who are the new holders, the bonus shares lead to to dilution, so the EPS of EKAD fell slightly by 5.9 %, despite the increase in net profit.

So if based on financial statements for the period of the third quarter 2011, EKAD is less attractive. The stock had unreasonably skyrocketed in June to July 2011 from position 250 to 700 (I don’t know if it was related to the bonus shares or not), but later EKAD continued to drop, back again into the 250s.

But now, after about six months later, EKAD has recovered and has gone up by 30%. Although slowly, but so far its trend so good. If we look at the PBV that is still at a fair value of 1.5 times, and EKAD increase in equity of about 30% per year, then EKAD may climb up to position of 420 in the next six months. On the other hand, EKAD position at the moment is strong enough above the psychological support of 300, so unless its next financial performance is unexpectedly turning bad, either because of the weakening of Rupiah or the others, then the shares will not fall back. So the risk is relatively small. About its PER that is only 7.5 times, it is not so interesting to note, because the PER of stocks in the chemical sector is almost always lower than the other sectors that are more popular, such as palm oil plantations, coal, property, consumer, or banking.

In final conclusion, EKAD is ideal for those of you who are not so aggressive in the market, but more interested in the constant gain in the long run. Because although EKAD does not seem to promise a substantial gain, let say above 50% in a year, but the risk is also minimal. If you are a trader, this stock is tend to not going to everywhere, but just moving around in the range of 320 - 345. So if you do the day trading at this stock, the potential gain could reach 5% in just three or four days, not bad!

PT. Ekadharma International Tbk.
Rating performance in Nine Months 2011: A
Rating shares at 325: A

Original article was written at March 22, 2012

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